Will the full amount of capital written off be considered a deemed dividend or only the interest portion on the debit loan up to the date that the debt is written off and the capital written off attract capital gains tax?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
You state that the two individuals are ‘both employed by the company’. We are not certain why it is believed that no taxable benefit (Seventh Schedule to the Income Tax Act) arises. Our guidance accepts that, with regard to both parties (holder of shares and spouse), the debt arose by virtue of a share held in the company.
We then agree, that whilst the debt was owing to the company, the ‘interest benefit’ (not a market-related interest) will be deemed to be a dividend declared by the company (and subject to the dividends tax). This doesn’t give rise to further debt and we therefore don’t agree with your statement in this regard.
When the loan written of in the company, a capital loss (in the company) will arise. We agree that that would constitute a dividend. With regard to the spouse we remind you that this, as explained above, assumes that it was done in respect of a share. The dividend itself will then be exempt from normal tax in the recipient’s hands and no capital gain will arise there. The principle is that the dividend is consideration for purposes of the reduction amount.